Who said tax is boring?

Make it a double, Paddy

“Look. This one doesn’t bend.”

The scene in Disney’s Snow White, where the wicked witch entices the heroine with a poisoned apple, has fueled the nightmares of generations of kiddies since it first saw the light of day (or should that be ‘the dark of night’?) in 1937. I had double the reason to be terrified as my parents had an old acquaintance – the mother of a friend – who, I was genuinely convinced, must be related to the evil lady. Her name was Megan, born sometime in the last decade of the 19th century. She had masses of unruly hair that matched her nicotine-stained, spindly fingers. And she spoke in an Irish smoker’s brogue. Bed-wetting material, par excellence.

Half a century later, I can still hear my parents talking about her having been in the “Post Office”. For years, my mind’s eye saw her going from house to house delivering mail and, when some unfortunate maiden opened the door, offering her a juicy red apple. It was only when she had died, and I had progressed to a higher degree of cognitive reasoning, that I understood that she had been an Irish Volunteers (later, IRA) operative in the 1916 Easter Rising. She was in the General Post Office on O’Connell Street when almost the entire leadership was carted off by the British and put in front of a firing squad.

Although the Easter Rising served to unite the people of Ireland in the cause of independence, it was a bit daft really. The arms the rebels were counting on were intercepted by the British, and they knew that they didn’t have a chance, but they went ahead anyway.

The Irish are big on miracles

In the spirit of 1916, over the last 30 years successive Irish governments have proven adept at blundering almost thoughtlessly into madcap schemes for economic progress, like the 12.5% corporate tax rate; miraculously they keep pulling them off. They managed to build a Tiger economy without an ounce of local initiative, relying on US multinationals and extremely generous European Union aid. True, they were hit quite badly by the global financial meltdown, but they pulled out of that faster than any of the other crisis countries.

It would appear that the luck of the Irish may be running out (or, maybe, not). The EU Commission is investigating whether tax agreements with the Irish Government brought Apple and 4,000 juicy jobs to the depressed area of Cork. For the first time, the Commission is using the argument of ‘State Aid’ to attack a tax break (Fiat and Starbucks are getting it in the neck elsewhere).

The alleged scheme is annoyingly simple (almost, crass) and has been an open secret (but not necessarily in relation to Apple) to international tax advisers for years. Referred to as the ‘Double Irish’, it takes advantage of two bits of Irish Blarney in local law. Firstly, as opposed to just about every other nation no longer in loin cloths, Ireland did not have significant Transfer Pricing rules until recently. Secondly, Irish law defines tax residency of a company purely on the basis of management and control (most countries today have an additional test of place of incorporation).

Once those fiercely permissive non-rules were in place, it was time to pour the Guinness. Apple (and there will be plenty more US companies joining the wake, if the EU pull this one-off), is, it appears, accused of establishing two companies in Ireland. One, subject to the standard astronomical rate of 12.5%, is alleged to have carried on the business. Lest Apple be saddled with such an unacceptable tax rate, that company had an agreement to pay royalties to the other Irish company (it’s subsidiary) at a Disney fantasy rate. The second company, however, was managed and controlled from an offshore jurisdiction (BVI is popular) so was not liable to tax in Ireland (not even withholding tax on the royalties). Abracadabra – a minimal level of taxation in Ireland. Now, the US has, as everybody knows, a fairly draconian system for catching low-tax profits of foreign subsidiaries (Subpart F) in its tax net. The only part of this scheme requiring intelligence (the American part) required that the lower Irish company check-the-box for US purposes turning it, effectively, into a branch of the other Irish company. The intercompany payments then, if the rumours are true, disappeared for US tax purposes.

The irony of all this is that the Irish might still come out of this laughing. If the scheme is found to be State Aid, Apple may be required to pay an absolute fortune in tax – to the Irish Treasury. The Irish Government is claiming innocence in the whole matter (it will need to get over the hurdle of how the world’s tax advisers knew what was going on while it didn’t, AND possibly embarrassing revelations concerning those rulings). Apple, meanwhile, can reasonably claim that it did nothing wrong – a sovereign country (and EU member, to boot) offered it a favourable ruling.

Workaholics or Alcoholics?

The Irish Government has belatedly announced that it is taking steps to eliminate the Double Irish – from January 2015 it is proposed that companies incorporated in Ireland will be Irish resident under domestic law. With headline rates in other jurisdictions brushing against their once incredibly favourable rate, the Irish may have to start doing things for themselves. They could try learning from the Seven Dwarfs: ‘Hi Ho, Hi Ho, it’s off to work we go’.